Installment Sale: How Much of Each Payment Is Gain?
Each qualifying principal payment contains a gain portion and a basis-recovery portion. Interest is separate.
Step 1: gross profit
Calculate gross profit from selling price less adjusted basis and applicable selling costs as required by the problem.
Step 2: gross profit percentage
Gross profit ÷ contract price = gross profit percentage.
Step 3: apply to collections
Multiply qualifying principal payments by the gross profit percentage to determine the gain portion. The remainder generally represents basis recovery.
Interest
Interest income is separate from installment-sale gain and should not be included in the gross profit percentage.
Depreciation recapture
Certain recapture generally must be recognized currently rather than deferred under the installment method.
The takeaway
Principal is split between gain and basis recovery. Interest stands on its own.
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FAQ
Is the entire payment taxable gain?
No.
Is interest included in gross profit percentage?
No.
Can depreciation recapture be deferred?
Certain recapture generally must be recognized immediately.